Bullwhips and Chasing Inventory for Value

One again, the Bullwhip effect.  which we often brought up for its influence in inventory in CPG.  Here new work on studies with data from. Chinese Groceries.

A Counterintuitive Way to Keep Shelves Stocked and Prices Down

New research suggests how to improve supply-chain efficiency and avoid “inventory runs.” Based on the research of Robert L. Bray, Yuliang Yao, Yongrui Duan and Jiazhen Huo

Ask your local liquor store how much of a certain beer they sell, and you will likely get similar answers from week to week.

“They might sell twelve six-packs one week, then eleven, then twelve, then thirteen,” says Robert Bray, an associate professor of operations at Kellogg.

But ask the brewer who makes that beer how much they ship weekly, and the story gets more complicated. It would be normal for a brewer to be responding to orders to ship 500 cases of beer for three weeks straight and then zero the next week, Bray says. “The brewer is going to see really volatile changes.”

This phenomenon, which happens in all kinds of industries, is what experts call the “bullwhip effect.” As demand moves up the supply chain, from consumers to stores to suppliers, it becomes more and more unpredictable—just as a tiny flick of the hand morphs into a wild, forceful smack as it travels down the length of a bullwhip.

But the bullwhip effect is not merely a concern for retail managers and suppliers. When suppliers and distributors are unable to predict demand, the supply chain becomes less efficient.

“And who’s ultimately going to pay for that? The consumer,” says Bray, since those inefficiencies are passed on to shoppers in the form of higher prices and sometimes product shortages.

But what causes the bullwhip effect—and can at least some of the price hikes and shortages be alleviated?

A new study by Bray, along with Lehigh University’s Yuliang Yao and Tongji University’s Yongrui Duan and Jiazhen Huo, tested one theory behind the effect.

Analyzing data from a major Chinese grocery chain, the team found the first-ever hard evidence of what they call “inventory runs.” When retailers see that a supplier is on the verge of running out of an item, they order excessive amounts of that item in hopes of keeping their shelves well stocked—in the same way that customers of a failing bank mount a “bank run” to get their money out before the bank becomes insolvent.  .... " 

Related paper.   See also papers by Robert L. Bray